Don’t Break Up Facebook — Treat It Like a Utility

Executive Summary

Recently Facebook co-founder Chris Hughes joined a chorus of voices arguing that regulatory agencies should apply antitrust authority to or even “break up” the digital giant. But breaking the company up is not the only way to temper its destructive effects. The author suggests an even more radical approach, arguing that Facebook and firms like it have become natural monopolies that necessitate a novel, stringent set of regulations to obstruct their overreaches and protect the public against economic exploitation. To understand why, he applies rules of thumb from traditional competition and antitrust policy analysis.

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Recently Facebook co-founder Chris Hughes joined a chorus of voices (including presidential hopeful Elizabeth Warren, Texas Senator Ted Cruz, and former Secretary of Labor Robert Reich) arguing that regulatory agencies should apply antitrust authority to or even “break up” the digital giant. Hughes positioned the move as a necessity to subvert the more insidious effects we have seen arise from Facebook and similar platforms, such as the spread of disinformation and hate speech. His argument drew a great deal of popular support from the broad public as well as sharp criticism from the competition policy establishment. The company itself also pushed back, with newly-minted public policy executive Nick Clegg penning a comeback arguing that breaking Facebook up would only serve to punish an innovative company that has created tremendous economic value.

Critically, though, breaking the company up is not the only way to temper its destructive effects. I suggest an even more radical approach: I contend that Facebook and firms like it have become natural monopolies that necessitate a novel, stringent set of regulations to obstruct their capitalistic overreaches and protect the public against ingrained economic exploitation. While this option does not exclude the possibility of also pursuing a policy of break-up, I believe it is the more important objective and must take precedence. To understand why, we can apply rules of thumb from traditional competition and antitrust policy analysis, in which policymakers consider the economic dynamics of the industry in a step-wise manner.

The first step is to consider whether the industry in which the company operates is “competitive.” To do so the Justice Department’s Antitrust Division and the Federal Trade Commission typically consider the relative market share of the firm in question. (Which agency actually makes the determination depends the particular circumstance.) There is no explicit threshold for how much market share a company can have before it is considered a monopoly, though the FTC typically does not scrutinize a company for monopoly power if it occupies less than 50 percent of a market, while the lowest-ever market share determined to result in monopoly power by the European Commission was 39.7 percent. If the market appears competitive, you typically leave it alone; if it isn’t (as, I would argue, is the case for the leading Silicon Valley digital giants), then you move to the next step of analysis.

Let’s apply this to Facebook. The company’s industry can be hard to define because the company’s holdings and technological features change so quickly, as does the overall sector; the same can be said of the other large consumer internet firms. Given Facebook’s many platforms—including Messenger, WhatsApp, Instagram, and the big blue app—the firm covers social media, photo sharing, and messaging, among other industries. Given this, I would contend that, in the United States, Facebook has a dominating presence in each of its consumer areas of activity. This suggests that the primary markets in which it operates services are indeed no longer competitive.

Second, to move a competition policy inquiry forward in the United States, the company in question must not only be deemed to have excessive market share: It must also be shown to use this market position to exploit the consumer — a standard that the judicial system has over time taken to mean consumer price hikes.

Many experts have contended that companies like Facebook and Google do not engage in such exploitation, because consumers are not charged money for access to even the highest revenue-generating services such as social media and search. But this conclusion is wrong-headed. Various forms of currency have lubricated various markets throughout history. The currency extracted from individuals in the consumer internet context is typically not money, but a novel, complex combination of the individual’s personal data and attention. Given the market concentration exhibited by companies like Facebook and Google in their respective industry silos, one could suggest that these are pseudo-monopolistic firms that collect so much data and exploit so much of our attention in such invasive and questionable manners that they necessarily and systematically leave consumers in the lurch. As I discuss in a recent paper, these firms are two-sided platforms that have monopolized the consumer side; accordingly, they extract the end consumers’ currency on one side of the platform at extortionate monopoly rates, and exchange it for monetary revenue at tremendously high margins on the other side of the platform. It is this subtle but corrosive form of exploitation that policymakers should find most objectionable.

The third step is to examine the market to see whether fledgling entrepreneurs and other firms could someday compete in the industry. If so, then then you should pursue a series of “pro-competition” policies. These may range from issuing targeted regulations that narrowly protect consumers from certain forms of harm to actively breaking them up. This is what Hughes and others have suggested for Facebook.

But if you cannot foresee any entrepreneur ever naturally competing with the incumbents, the prescription is entirely different. In this case, the firm is a “natural monopoly.” Railroads, roadways, and telecommunications firms have in the past been considered natural monopolies because their costs of infrastructure and other barriers to entry suggest there should be no more than one player in each of those particular markets. When policymakers reach such a conclusion about a firm, they typically first attempt to institute a set of rigorous “utility”-like regulations so that consumers are protected from exploitation before considering other ancillary forms of regulatory policy. For example, the federal government regulates telecommunications firms’ minimum levels of service for emergency calling and provides guidelines for their handling of consumer data.

I believe that the consumer internet is a kind of natural monopoly. Its leading constituent firms consistently exhibit network effects: the networked services operated by Facebook, Amazon, and Google increase in value when more users use them. This meanwhile makes it extraordinarily difficult for new entrants to offer competitive levels of utility to consumers out of the gate. As with telecommunications before it, this industry now maintains impossibly high barriers to entry. The leading internet companies have gradually established intricate, proprietary physical and digital infrastructures through the placement of new physical networks, the cultivation of preferential access to broadband providers and content owners, and the creation of an exclusive consumer “tracking-and-targeting” regime that necessarily shuts out the competition from access to the market for consumer data and attention. Furthermore, if a new entrepreneur does develop an innovative idea that picks up to a degree, an internet monopoly can readily acquire or copy it, and integrate it into its existing infrastructure. Given this, I believe there is no capacity for a second firm to effectively compete against Facebook in the market silos it dominates or the other internet giants in theirs.

Thus, while breaking up the firms may not be a bad idea, our first instinct should instead be to strike straight at the business model that makes these firms so dominant with clear and stringent regulations to protect the dynamism of markets and consumers themselves – not to mention the integrity of the media ecosystem and the openness of journalistic inquiry. Otherwise, companies like Facebook will likely continue to maintain and strengthen their monopoly positions, further building their hegemony over consumer data, industrial intelligence, and digital and physical infrastructure.

If we agree that firms like Facebook are natural monopolies, we should then begin to consider utility regulations that can effectively hold them accountable to the public. In the past, the United States has given such designations to both private and public monopolies (including for instance electric utilities) that have variously resulted in the creation of new regulatory agencies to treat monopolistic overreach. In the case of consumer internet firms, such regulations could entail: stricter standards concerning user privacy and data processing; clear and consistent investigations into over any proposed merger, acquisition, or growth of business into parallel industries, especially in cases where excess concentration or market bottlenecking could result; complete transparency into the ways that the industry’s algorithms disseminate ads and content, particularly to marginalized classes of the population; taxes or stipulations to uplift public interests such as independent journalism and digital literacy; and minimum required investments into technologies that can detect and proactively act against obvious instances of hate speech and disinformation, among others.

All of this need not mean we should not also pursue breaking up these firms. But doing so may not effectively address the harms wrought by consumer internet firms with immediate effect and is thus a lesser imperative. What the U.S. government should in fact pursue are the overreaches of a business model that has systemically subverted the public interest and perpetuated a series of negative externalities in our media and information ecosystem. The economic design of the United States rightly gives the capitalistic market free sway to innovate — but when such commercialization breeds exploitation of the individual, our nation has always taken action to protect our democratic interests ahead of the freedom of markets. The consumer internet should be no different.

Dipayan Ghosh is a Shorenstein Fellow and co-director of the Platform Accountability Project at the Harvard Kennedy School. He was a technology and economic policy advisor in the Obama White House, and formerly served as an advisor on privacy and public policy issues at Facebook. He is the author of Terms of Disservice (forthcoming, November 2019). Follow him on Twitter @ghoshd7.